{"id":78,"date":"2010-03-16T16:15:26","date_gmt":"2010-03-16T16:15:26","guid":{"rendered":"http:\/\/business-ownermagazine.com\/?p=78"},"modified":"2016-10-12T11:54:36","modified_gmt":"2016-10-12T16:54:36","slug":"tax-planning-in-a-recession","status":"publish","type":"post","link":"https:\/\/www.americanbusinessmag.com\/2010\/03\/tax-planning-in-a-recession\/","title":{"rendered":"Tax Planning In A Recession"},"content":{"rendered":"<p>Given the current and past economic crisis, many businesses are in serious danger as revenues are falling and profits disappearing. While\u00a0 even leading economists disagree sharply as to the expected length of the current recession, they all certainly agree\u00a0 that the\u00a0 recession will end. The real question for many small businesses is whether they can survive long enough to feel the effect of the recently enacted economic stimulus and reach the recovery period.<\/p>\n<p>A common myth in poor economic times is that tax planning is no longer necessary. This is a popular misconception as it seems\u00a0 reasonable to presume that as a business\u2019 profits shrink, the taxes imposed upon the business owner and the business itself will also\u00a0 shrink or disappear altogether. Hence, as a business will incur little or no income taxes, no planning is necessary. Unfortunately,\u00a0 business owners who believe this myth are only increasing the probability that their businesses will not survive the recession.<\/p>\n<p>In contrast, an educated business owner must understand that comprehensive tax planning is significantly more important in times of\u00a0 economic peril than in times of economic prosperity. Simply put, tax planning in good times may substantially increase overall\u00a0 profits, but tax planning in tough times is a matter of necessity, as it can mean the difference between a business surviving or\u00a0 collapsing. This is based on two simple points. First, tax planning can dramatically improve cash flow. Second, an owner must understand that income taxes are only a part of the overall business tax burden. Most businesses also incur substantial payroll tax, franchise tax and sales\/use\u00a0 tax burdens, which are not based upon profits and therefore may not decrease during a recession.<\/p>\n<p><strong>Improving business cash flow<\/strong><br \/>\nWhether during prosperity or peril, cash flow is always the lifeblood of a business. In the current recession, cash flow for many businesses has become extremely strained as revenues are declining, payments are received later and later and banks are tightening lending standards and reducing credit lines. Tax planning is critical, as many tax planning techniques can significantly improve cash\u00a0 flow by allowing a business or business owner to either reclaim taxes paid in previous years (reducing current-year taxes), defer taxes\u00a0 to a future year or allow other costs to be reduced.<\/p>\n<p><strong>Net operating losses<\/strong><br \/>\nUnfortunately, many formerly profitable businesses incurred substantial losses in 2008 and may incur similar or greater losses in\u00a0 2009. While no business owner wishes to incur losses, the potential benefits of planning for these losses cannot be ignored. In fact,\u00a0 these losses can provide immediate and current cash flow benefits as the Internal Revenue Code (IRC) allows businesses to apply\u00a0 current net operating losses to earlier tax years and claim a refund for taxes paid in these years. For example, if a corporation realized\u00a0 taxable income of $100,000 in 2007 (and a resulting tax liability of $22,250), but realized a net operating loss of $100,000 in 2008,\u00a0 the corporation can claim a refund of the $22,250 of taxes paid in 2007.<\/p>\n<p>Recent legislation has expanded the opportunity to claim refunds from previous tax years. The IRC formerly allowed taxpayers to\u00a0 carry back losses for two years, but \u00a71221 of the American Recovery and Reinvestment Act of 2009 allows a business to now carry\u00a0 back losses for three, four or five years to recover taxes paid in earlier years. It is extremely important for business owners and tax\u00a0 professionals to be aware that this provision allows the business owner to select the carryback period. This differs from previous\u00a0 provisions, which mandated a two-year carryback period or a five-year carryback period under post-9\/11 provisions. Therefore, the\u00a0 business owner and his or her tax advisor must analyze whether a three-, four- or five-year carryback provision will result in the\u00a0 largest tax refund.<\/p>\n<p>The extended carryback period and the specific period must also be affirmatively elected by the business within the specified time\u00a0 period. Failure to affirmatively elect the extended carryback period will allow a business to carry back losses only up to two years.\u00a0 This may substantially limit refund claims. Proper tax planning will ensure that all current-year losses are fully analyzed and the\u00a0 potential refunds maximized.<br \/>\n<!--nextpage--><br \/>\n<strong><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-280 alignleft\" src=\"\/wp-content\/uploads\/Tax-Planning-w10-2.jpg\" alt=\"Tax Planning\" width=\"250\" height=\"185\" \/>Deferral techniques<\/strong><br \/>\nA comprehensive tax plan would also review a business\u2019 chosen methods of accounting for revenues and expenses. In the proper\u00a0 circumstance, a change of a business\u2019 current method of accounting may allow recognition of revenues to be delayed or deductions to\u00a0 be accelerated to the current period. These methods are sometimes criticized as simply deferring taxes and not \u201csaving\u201d taxes, but\u00a0 this is a short-sighted approach, especially in the current economic climate.<\/p>\n<p>Tax is cash outlay\u2014a cash expenditure. Therefore, postponing a cash expenditure to a later time (deferral) increases cash balances within a business currently (now). In times of economic stress, all should agree that deferring every expense to a later period may mean the difference between survival and failure. For example, do most businesses pay their vendors immediately upon receipt of an invoice even though the invoice may not be due for 60 days? Or do they pay the invoice on the required payment date? Realizing not only the time value of money but also the needs for cash in a business, most pay on the last possible day. Why should Uncle Sam be any different?<\/p>\n<p>Proper selection of a business\u2019 various accounting methods can significantly reduce the business\u2019 current tax burden and positively\u00a0 affect cash flow. In many cases, a change may be accomplished with a simple attachment to the company\u2019s current-year tax return.\u00a0 While the execution may be simple after confirming a company qualifies for an alternative method of accounting, the results can be striking.<\/p>\n<p>For example, let\u2019s say a business owner acquired a new office building for $2,000,000. A change may be recommended in the\u00a0 depreciation method for the building that could greatly accelerate deductions from later years to the current year. A successful\u00a0 alteration could increase the firstyear depreciation deduction from $25,000 to nearly $130,000, thereby saving the business owner\u00a0 $42,000 in taxes.<\/p>\n<p>Let\u2019s use a Texas company involved in leasing equipment to oil field operators and utilizing the accrual method of accounting as a\u00a0 second example. If the company\u2019s overall accounting method was changed from the accrual method to the cash method, the\u00a0 company\u2019s net income could be greatly reduced. If the tax expense is substantially reduced, greater cash flow is facilitated. A significant addition to cash flow could be enough for this business to weather the economic storm.<\/p>\n<p>During a recession, these techniques remain critical, as even an unprofitable business may benefit greatly from a change in an accounting method. As the IRC allows businesses to carry back current-year net operating losses to claim taxes paid in earlier tax\u00a0 years, a change in accounting method that causes a small loss to grow to a greater loss will allow a much larger amount of taxes paid in\u00a0 previous years to be reclaimed. In combination with the expanded net operating loss provisions of the American Recovery and\u00a0 Reinvestment Act of 2009, a change in accounting method may vastly increase current cash flow.<\/p>\n<p><strong>Employee benefits<\/strong><br \/>\nEmployee benefits, including health insurance and retirement plans, are often eliminated during poor economic times. In some\u00a0 instances, eliminating plans entirely is difficult, as many employees and business owners may rely heavily on these benefits. A comprehensive tax review of a company\u2019s current benefits may allow the essential benefits to be retained but at a lower cost to the company.<\/p>\n<p>For example, health savings accounts and health reimbursement arrangements have been added to the IRC in recent years. Both of\u00a0 these plans provide for substantial company savings through reduced insurance premiums by utilizing a high-deductible health care\u00a0 plan in conjunction with an employee reimbursement account, for example. In many scenarios, the company realizes savings through\u00a0 educed premium costs, even while the employees\u2019 health care costs are reduced.<\/p>\n<p>Moreover, in the event a business wishes to reduce health insurance costs by reducing the amount of the premiums the company bears, a Premium Only Plan (POP) can be implemented to mitigate the impact upon the individual employee. A POP allows employees\u00a0 to pay these premiums with pre-tax (instead of after-tax) dollars. At the same time, because the premiums are paid on a pre-tax basis,\u00a0 the company can realize significant payroll tax savings.<\/p>\n<p>A review of a business\u2019 current retirement plan may also result in substantial savings to a business. A variety of retirement plans are\u00a0 available to small- and medium-size businesses. The administrative costs and mandatory company contributions also vary wildly\u00a0 among plans. A change in plans can result in reduced administrative costs and\/or company contributions, which can be necessary\u00a0 when the business\u2019 survival is threatened.<br \/>\n<!--nextpage--><br \/>\n<strong><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-281 alignleft\" src=\"\/wp-content\/uploads\/Tax-Planning-w10-3.jpg\" alt=\"Tax Planning\" width=\"265\" height=\"398\" srcset=\"https:\/\/www.americanbusinessmag.com\/wp-content\/uploads\/Tax-Planning-w10-3.jpg 265w, https:\/\/www.americanbusinessmag.com\/wp-content\/uploads\/Tax-Planning-w10-3-199x300.jpg 199w\" sizes=\"auto, (max-width: 265px) 100vw, 265px\" \/>Other taxes<\/strong><br \/>\nAs previously mentioned, the common misconception is tax planning is not necessary in a recession as a struggling business incurs\u00a0 little or no income taxes. However, this reasoning ignores the fact that while federal, state and local income taxes are a part of the\u00a0 overall tax burden, other taxes such as franchise taxes, payroll taxes and sales and use taxes can also be a significant expense for a\u00a0 business. Unlike income taxes, which will normally decrease in times of uncertainty, franchise taxes, payroll taxes and sales\/use taxes\u00a0 ay remain constant or diminish only slightly. Therefore, in times of economic difficulty, these taxes become more critical to\u00a0 control.<\/p>\n<p>Many employers see payroll taxes simply as a cost of doing business and don\u2019t realize that specific strategies can be implemented to\u00a0 lessen payroll costs. Many businesses offer health insurance to employees in which the employees\u2019 share of the premiums are paid\u00a0 with after-tax funds. Yet simple changes to the structure of the plan can allow these premiums to be paid on a pre-tax basis, thereby\u00a0 saving the employer significant payroll taxes. For example, a business owner providing health insurance to 20 employees, of which\u00a0 each employee has $5,000 deducted from his or her paycheck annually, can save $7,650 annually by providing a plan to allow these\u00a0 premiums to be paid on a pre-tax basis.<\/p>\n<p>The corporate structure also plays a significant role in the payroll taxes incurred by a business owner. In a C corporation, a business\u00a0 owner often controls the corporate income by claiming significant salaries. Unfortunately, the business owner will incur a payroll tax\u00a0 liability that will rise as the salary increases. A recommendation to change the corporate structure can allow profits to be withdrawn\u00a0 from the business with no payroll taxes.<\/p>\n<p>Many, but not all, states impose a franchise tax on a business for the privilege of doing business in the state. In some states, these rates\u00a0 re small, but several states impose substantial franchise taxes. In most cases, franchise taxes are imposed upon the business\u2019\u00a0 \u201ccapital.\u201d Thus, a business can incur significant losses but still incur high franchise taxes. When cash flow is strained and profits have disappeared, these franchise taxes are a substantial burden.<\/p>\n<p>Sales and use taxes can also be a significant burden for companies, especially asset-heavy businesses. These taxes are due regardless\u00a0 of a business\u2019 profitability. For example, a business purchasing an asset worth $30,000 will generally incur a sales tax ranging from\u00a0 $1,200 to $3,000, depending on the combined state and local sales tax rates. Again, entity structuring can lessen this burden by\u00a0 deferring the tax over a period of years rather than the tax being due immediately. Using the same example, the business would incur\u00a0 sales tax from $240 to $600 in the year of purchase rather than $1,200 to $3,000. This creates a substantial, immediate cash flow\u00a0 benefit that can allow a business to survive.<\/p>\n<p><strong>Conclusion<\/strong><br \/>\nAs illustrated, many comprehensive tax planning techniques can aid a business in surviving the current economic crisis. Proper implementation of these cash-increasing strategies can certainly be the difference between a business surviving and failing. Yet most\u00a0 tax professionals and preparers utilized by small- and medium-size businesses are occupied with the compliance aspect of the\u00a0 businesses or are simply not capable of identifying and adopting these strategies for their clients.<\/p>\n<p>The complexity of comprehensive tax planning, especially in a recession, underscores the need to utilize the services of an accomplished tax planning firm that employs tax professionals with expertise in many areas of practice. The services of a firm\u00a0 well versed in recent legislation and the needs of small businesses may be indispensable to a small- or medium-size business struggling\u00a0 to survive the current economic downturn.<\/p>\n","protected":false},"excerpt":{"rendered":"<div class=\"mh-excerpt\"><p>Given the current and past economic crisis, many businesses are in serious danger as revenues are falling and profits disappearing. While\u00a0 even leading economists disagree sharply as to the expected length of the current recession, <a class=\"mh-excerpt-more\" href=\"https:\/\/www.americanbusinessmag.com\/2010\/03\/tax-planning-in-a-recession\/\" title=\"Tax Planning In A Recession\">[&#8230;]<\/a><\/p>\n<\/div>","protected":false},"author":5,"featured_media":279,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[20,18,19],"class_list":{"0":"post-78","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-tax","8":"tag-recession","9":"tag-tax-plan","10":"tag-tax-planning"},"_links":{"self":[{"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/posts\/78","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/comments?post=78"}],"version-history":[{"count":11,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/posts\/78\/revisions"}],"predecessor-version":[{"id":3858,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/posts\/78\/revisions\/3858"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/media\/279"}],"wp:attachment":[{"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/media?parent=78"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/categories?post=78"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.americanbusinessmag.com\/wp-json\/wp\/v2\/tags?post=78"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}